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Russia: Gazprom Seeks To Recapture Business In CIS

Russia's Gazprom has announced this week that it will reverse course by dealing directly with CIS countries and the Baltics on gas supplies, which have been handled for years by gas trader Itera. The gas monopoly is responding to investor complaints about lost profits, but it has yet to explain why it gave the business away.

Boston, 14 June 2002 (RFE/RL) -- After years of nagging questions from investors and reformers, Russia's gas monopoly Gazprom said this week that it will try to recapture its lost business in the Commonwealth of Independent States.

On Monday, Gazprom chief executive Aleksei Miller announced that the world's biggest gas company has given a subsidiary one month to submit plans for taking over distribution in the CIS and Baltic countries, Dow Jones news service reported. Gazprom's Mezhregiongaz unit now handles Russia's domestic sales.

Analysts are divided over whether the decision will spell serious competition for Itera, the mysterious private firm that has grown to dominate the CIS gas trade since it started dealing with Turkmenistan in 1994. Some believe that Itera has become so entrenched in the business that it will be hard to replace, though it got its business from Gazprom in the first place.

The Moscow-based United Financial Group said in a research note that, "it may be difficult for Gazprom to compete with Itera," because the price of Turkmen gas used in much of the CIS trade is already high, compared with Russian fuel. UFG said Gazprom may have to boost its own production or limit supplies to the Russian market before it can free up enough cheap gas to compete.

Another possible hurdle may be the suspicion of Gazprom in countries like the Baltic states, where memories of political pressure and murky dealings over fuel supplies run deep. The Russian government owns 38 percent of Gazprom.

But the biggest question about Miller's announcement affecting Itera is why it took so long. Analysts have complained about Itera's inroads into Gazprom's former business for years, citing the lack of transparency at the private gas company, which deals mainly in the CIS but has offices in the southern U.S. state of Florida.

If Gazprom's history has raised questions, the same can be said doubly for Itera. The relationship between the two companies has been the most curious of all.

Itera has used Gazprom pipelines and often Gazprom gas in its trading among CIS countries. It has also used stakes in gas fields acquired from Gazprom at below-market rates. For years, CIS countries that approached Gazprom about imports were reportedly steered to Itera, although Gazprom runs its own export operation for countries outside the CIS. Gazprom has never said why.

No explanation was forthcoming in the statement issued by Miller, who was appointed by President Vladimir Putin a year ago to reform the monopoly. But the timing suggests that Miller is seeking to avoid criticism of his slow progress before Gazprom's annual general meeting on 28 June.

At the start of this year, Miller moved to reclaim some of the gas interests that were sold to Itera by the previous Gazprom management on the cheap. But last week, Gazprom minority shareholder William Browder, managing director of Hermitage Capital Management, drew particular attention to the Itera issue.

In a briefing organized by the investment bank Troika Dialog, Browder said, "While everyone was focusing on lost gas fields, attention was completely diverted away from the CIS gas-distribution business that was lost to Itera."

Browder calculated that Gazprom has lost more than $1 billion in annual pre-tax profit to Itera, including $688 million in Ukraine, $111 million in Kazakhstan, and $99 million in Azerbaijan.

The industry newsletter Petroleum Argus said this week that Itera earned $1.7 billion from supplying gas to Ukraine last year, in addition to $150 million from Belarus and $100 million from the Baltic states.

Argus said Gazprom's former chairman, Rem Vyakhirev, gave Itera "total freedom" to move into distribution for the former Soviet area five years ago. One reason is that nonpayment and theft were big problems, and Itera was adept at tough collection methods, the newsletter said. But few CIS users would be likely to accuse Gazprom of not being tough enough. The argument seems to apply mostly to some deliberate Kremlin match making between Turkmenistan and Ukraine, which cut Russia's risk of losses from Ukrainian transit lines to Europe.

Argus also cited another possible reason for the rise of Itera, which it said is "widely believed to be linked to former Gazprom managers." Itera has repeatedly denied such ties, but many analysts remain unconvinced.

A greater question is why Miller has taken a year to raise the Itera issue or to renew direct trade with markets that reliably pay their bills. Gazprom has defended its gas-export monopoly against independent oil companies, but in Itera's case, it has given export business away. Miller may be called upon to explain the slow changes in dealing with Itera at the annual meeting later this month. It may also be an occasion for an accounting of how business was done in the past.